In finance, a company’s gross margin is simply the difference between revenue and cost of goods sold (COGS) divided by that revenue figure. Unlike gross profitswhich are expressed as absolute dollar amounts, gross margins are expressed in percentage forms.
The calculation for gross margin is expressed by the following equation:
Gross Margin=(RevenueRevenue−COGS)×100where:COGS=Cost of goods sold
Gross margin is merely one measurement of a company’s profitability, because it solely factors the costs of doing business directly related to production. To further refine this profitability metric, a company next generally deducts all of its common overhead and operating expenses, including wages, as well as any administrative, facilities, marketing, and advertising costs. The figure that remains after subtracting these values is known as the operating margin, which is also known by the phrase “earnings before interest and taxes, or EBIT.”
The final profitability calculation, which shows a company’s actual net profits or net profit margin, subtracts interest, taxes, gains, or losses from investments, as well as any other extraneous costs the company may have incurred, that weren’t included in the calculations for gross margin or operating margin.